| Updated: September 12, 2025Regulatory framework, part I
This lesson will cover the following
- Trading practices in the past
- Regulators of the stock market – The Securities and Exchange Commission (SEC) in the United States
Despite not overseeing other people’s money or having an employer, a day trader still has rules to follow. A day trader must comply with securities laws and exchange regulations, some of which are directed at traders who make many entries within a short period. Brokers offering services to day traders are also bound by regulations; therefore, by understanding these rules it is easier for a day trader to decide which broker or service to choose.
Trading practices in the past
After the telegraph was invented, traders were able to receive price quotes on a daily basis. In many large cities, so-called bucket shops were established. These were places where traders could bet on price changes in commodities and stocks. This was simply betting against other players. The practice was wiped out after the stock-market crash and the beginning of the Great Depression in 1929.
After 1929 small investors were able to trade off the ticker tape, on which price changes were printed. Commonly they visited the conference room at their brokerage company’s office and placed orders, taking into consideration price changes on the tape. In any case, traders did not have direct access to markets and had to use services provided by their brokerage firm. This meant that timely execution of their orders was not guaranteed.
- Trade Forex
- Trade Crypto
- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
Day trading was not so widespread in the past because brokerage firms charged identical commissions until 1975. Later, brokers began competing on the commissions they offered. Trading off the ticker tape continued to some extent until the stock-market crash of 1987. Brokers were overwhelmed by a flood of orders, so they serviced their largest customers first and placed the smallest orders at the bottom of the pile. Following the crash, stock exchanges and the Securities and Exchange Commission introduced a number of changes that would prevent another crash and improve order execution if such a scenario were to occur. The Small Order Entry System (SOES) was introduced, giving priority to orders of 1,000 shares or fewer over larger orders.
Later, in the 1990s, access to the Internet became widespread and a few electronic communication networks began providing small traders with direct access to price quotes. Because of the SOES, small traders were able to place orders and sell their stocks to larger companies, which allowed them to earn sizeable profits. This advantage was heavily criticised by large institutional traders and market makers. During that period, day trading was regarded as a respectable way to make a living.
In 2000 the SOES was modified, eliminating the advantage small traders had enjoyed. The number of discount brokerage companies offering online trading services increased significantly. Trading stocks on the Internet became hugely popular, while the SOES faded into the background. This was largely because the share prices of tech giants rose almost daily over a period of time. Between 1996 and 2000, the NASDAQ stock index surged from 600 to almost 5,000 points; in 1999 there were 457 IPOs, the majority of which were related to the Internet and technology. A total of 117 IPOs doubled in price during their first day of trading, fuelled by the hype. In 1999 and early 2000 the Federal Reserve raised its benchmark interest rate six times, as the economy urgently needed to cool down. On 9 March 2000 the NASDAQ index peaked at 5,048.62, but from 10 March 2000 it fell by about 10% over the next ten or so days.
Nowadays, both trading practices and the regulatory framework have changed.
Regulators of the stock market
Financial markets in the United States are generally regulated by two government institutions – the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), whose main objectives are to ensure that investors and traders receive clear and adequate information to make sound decisions, as well as to prevent fraudulent practices. Neither institution governs the markets entirely. Much of the responsibility for proper behaviour has been delegated to the exchanges and to self-regulatory organisations, which brokerage companies join.
Now let us examine the main functions of some of the major regulators.
The Securities and Exchange Commission (SEC) in the United States
The SEC is an agency entrusted with the task of ensuring that markets operate efficiently, protecting investors and facilitating the formation of capital. The US President appoints five commissioners to the agency; they are confirmed by Congress and serve five-year terms. The SEC has the authority to bring civil enforcement actions against individuals or business entities alleged to have been involved in accounting fraud, to have provided incorrect information or to have engaged in insider trading. The agency has three major functions:
First, to ensure that any business entity with securities listed on exchanges in the country submits its annual, quarterly and other periodic financial reports on time and reflects information accurately. This is particularly important for investors, because they must assess whether it will be profitable to invest in one company or another. Annual financial reports are accompanied by a narrative account, known as the ‘Management’s Discussion and Analysis’ (MD&A). Provided by executives of the company, this document presents the previous year of operations. As investments in the capital markets are not secured by the federal government, the prospect of large profits has to be weighed against equally probable losses. The disclosure of financial and other vital information about the issuing company and its securities provides private investors and institutions with the same basic information regarding the public companies they invest in, which increases public interest and scrutiny and diminishes the probability of fraudulent actions and insider trading.
Second, to oversee markets by ensuring that exchanges and self-regulatory organisations have sufficient regulations and that these are enforced.
Third, to provide regulation for mutual funds, companies providing financial advisory services and other business entities that oversee other people’s funds.